China economy recovering, bad debt risks dismissed

A delegate attends a meeting at the Great Hall of the People, venue of the 18th National Congress of the Communist Party of China, in Beijing November 9, 2012.
REUTERS/Carlos Barria

By Aileen Wang and Kevin Yao| BEIJING

BEIJING Comments by China's two top banking officials playing down the risks of bad debt in the banking system provided the latest upbeat signal from Beijing suggesting seven straight quarters of slowing growth have ended.

Markets will be looking for the remarks, from Central bank governor Zhou Xiaochuan and bank regulator Shang Fulin on Sunday on the sidelines of a congress to anoint a new leadership, to be backed up in coming days by solid lending data.

If so, that will close out a series of reports that have raised market expectations the worst is over for the world's second-biggest economy, although analysts say longer term China's new leadership will have to push reforms to ensure the country meets the goal outlined by outgoing President Hu Jintao to double 2010 GDP by 2020.

"Right now, bank profitability is relatively strong and they have conditions to increase provisions for loan losses and write off some bad loans to prevent future risks," Shang, chairman of the China Banking Regulatory Commission, told a news conference.

Bank lending data has become China's most closely-watched economic statistic in recent months as investors try to judge the likely pace of new investment projects Beijing is approving to prop-up growth in what is the world's fastest expanding major economy even if it is on course for its slowest year since 1999.

A pick up in growth from China would provide welcome news in the West, where industrialised economies are struggling following the debts built up during the global financial crisis. Japan on Monday said its economy shrank in the third quarter and the euro zone is widely seen as in recession.

The exposure of banks to high risk ventures, particularly in the property sector and outside regular lending channels in off-balance sheet "shadow banking" transactions, have gnawed at investors and worried ratings agencies.

Shadow banking in the United States focused on property has been widely blamed for triggering the global financial crisis.

Zhou, head of the People's Bank of China (PBOC), said he had noticed that China's shadow banking risks had become a topic of discussion, particularly overseas, but played down the risks.

"The nature and scale of our shadow banking system is different from those in the western countries and the problem and scale of our banking system is much smaller than theirs," Zhou said.

A report by Orient Asset Management Corp - one of four firms charged with cleaning up bad debts at China's banks - was cited by official media last week as saying bad debts could triple by the end of this year to 3 percent, but that would still leave them safely below international norms.

While Shang says the banking system does not face a systemic risk of bad debt, in comments on Thursday he identified loans to local government financing vehicles as an area of concern.

"We are tightly controlling new loans and will ensure no new loans to the sector," he said on Thursday.

Local government debt has been a dark cloud hanging over China's public finances since it was revealed that local authorities had racked up 10.7 trillion yuan of loans by the end of 2010.

The borrowing binge was triggered by the spending demands in Beijing's 4 trillion yuan stimulus programme launched in 2008 at the depths of the global financial crisis.

LENDING

China is set to publish bank lending data for October in the week ahead, with economists polled by Reuters forecasting net new loans of 600 billion yuan.

Those numbers could provide another piece of evidence to reinforce growing views that China's economy is turning up. The head of the country's powerful planning agency said on Saturday this year's 7.5 percent growth target would be beaten.

Statistics on Saturday showed China's trade surplus ballooned to its biggest in 45 months in October as export growth darted to a five-month high above 11 percent, surpassing expectations.

China's economy remains heavily levered to the external sector. Exports were worth about 31 percent of GDP in 2011, according to World Bank data, while an estimated 200 million Chinese jobs are supported by trade or foreign investment.

Data on Friday meanwhile showed infrastructure investment accelerated and output from factories ran at its fastest in five months.

The uptick in key indicators last month, after signs of a rebound emerged in September data, cemented views of analysts and investors that China's rebound was gathering momentum after a raft of measures by Beijing under its so-called policy fine-tuning.

China cut benchmark interest rates in both June and July, has lowered bank reserve ratios three times since late 2011 and made repeated, large-scale liquidity injections into the financial system. It also said in September it had sped up approval on infrastructure projects worth about $157 billion.

All that has engendered a view that policymakers have done enough to keep the economy ticking along. Investors had been concerned that efforts to cool the economy had been mistimed, unintentionally coinciding with a sharp slowdown in external demand, with recovery in the United States remaining tepid and Europe still unable to escape its sovereign debt crisis.

Zhang Zhiwei, chief China economist at Nomura, predicts China's economic growth will pick up sharply in the fourth quarter to 8.4 percent, which would be the highest in a year, from 7.4 percent in the third quarter.

"The stronger-than-expected export data in October supports our view," Zhang said. "We believe domestic demand is improving and will likely strengthen further over the rest of 2012 as the policy stance is set to remain loose," he wrote in a note to clients after Saturday's trade data.

Consumer price inflation eased to its slowest pace in nearly three years in October, to sit well below the government's official 4 percent target.

Government officials have said repeatedly they intended to use a period of slowing growth in 2012 to adjust economic policy settings, particularly around prices administered by the state, that might otherwise risk fuelling inflation.

Such reforms are regarded as crucial, both by foreign analysts and government think-tanks, if China is to maintain robust growth needed to close a yawning wealth gap and support an urbanisation drive core to Beijing's development plans.

Hu's keynote speech at the opening of the congress acknowledged as much. He said China's development should be "much more balanced, coordinated and sustainable".

The party, which has constantly stressed the need for continued one-party rule, has tied its legitimacy to economic growth and lifting hundreds of millions out of poverty.

Hu will hand over his post as party chief to anointed successor Vice President Xi Jinping. The congress ends on Wednesday, after which the party's new Standing Committee, at the apex of power, will be unveiled.

The economic challenges ahead for China's new leaders remain intense, even if the near-term risk of a sharp slowdown and massive job cuts - a so-called hard-landing - has been averted, according to Alistair Chan, an economist at Moody's Analytics.

"Outgoing President Hu Jintao, Premier Wen Jiabao, and other retiring members of the Politburo can exit knowing their efforts to engineer a soft landing are paying off," Chan said.

"A consensus seems to be emerging within China that the Hu�Wen administration missed opportunities for reform and that many problems were kicked down the road," he wrote in a client note.

"Without reform, productivity gains will slow. Growth in the first half of 2013 could rise back into the 8 percent range, but this is unlikely to last. In our view, the days of above 8 percent GDP growth in the Chinese economy are over." (Additional reporting by Koh Gui Qing and Kelvin Soh; Writing by Nick Edwards: Editing by Neil Fullick.)

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